The Anatomy of Large Valuation Episodes

The Anatomy of Large Valuation Episodes

Agustın S. Benetrix∗

Department of Economics and IIIS,Trinity College Dublin

Forthcoming in Review of World Economics (Weltwirtschaftliches Archiv)First submission: 17 September 2007

Accepted: 20 October 2008

Abstract

We examine cases in which there is a large shift in a country’s net foreign asset posi-tion due to the re-valuation of its foreign assets and/or foreign liabilities. We highlightthe differences in large valuation shocks between countries characterized by large grossstocks of foreign assets and foreign liabilities and countries exhibiting large net externalpositions. Finally, we analyze macroeconomic dynamics in the neighborhood of large valu-ation episodes.

JEL Codes: F32; F36

Keywords: international financial integration, valuation channel, valuation episodes

∗The author would like to thank an anonymous referee for helpful comments and suggestions, Philip R. Lanefor his continuous encouragement and help with the External Wealth of Nations database. The author gratefullyacknowledges the Institute for International Integration Studies (IIIS) at Trinity College Dublin for financial support.Please address correspondence to Agustın S. Benetrix, Institute for International Integration Studies, Arts Building,Trinity College Dublin. Dublin 2, Dublin, Ireland; e-mail: [email protected].

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1 Introduction

The rapid increase in gross stocks of foreign assets and liabilities has revived interest in thedynamics of the external account. In particular, there is a growing concern for the impact ofcapital gains on the value of foreign asset and liability positions, which has been named thevaluation channel of the external adjustment.

This growth in gross stocks, documented by Lane and Milesi-Ferretti (2001) , together withthe evidence on return differentials reported by Lane and Milesi-Ferretti (2001, 2007a), Tille(2008), Hung and Mascaro (2004) and Gourinchas and Rey (2007a), suggests that the valuationchannel plays an important role in the external adjustment process. For instance, well-timedcapital gains may make it unnecessary for a persistent debtor to run trade balance surpluses.Moreover, cross-border net capital gains can generate large wealth redistributions.

When the external adjustment is abrupt, the literature has focused on the study of currentaccount reversals and sudden stops (Milesi-Ferretti and Razin 1998a, 1998b, Edwards 2004 andCalvo et al. 2004). However, it is silent on the large movements in the external position that aredriven by large valuation gains or losses, rather than by large swings in capital flows.

As a result of the breakthrough made by Lane and Milesi-Ferretti (2001, 2007a), it is possi-ble to analyze sharp external adjustments from the valuation channel perspective. Since thisdatabase measures gross stocks of foreign assets and liabilities, the relative role of the rates ofcapital gain in both sides of the balance sheet as well as across different portfolio categoriescan be studied. Moreover, Lane and Milesi-Ferretti (2001, 2007a) provide enough informationto evaluate how the increase in gross stocks of foreign assets and liabilities affects these adjust-ments.

This paper makes a step in this direction. In particular, we evaluate how the upsurge ingross international financial integration has contributed to abrupt adjustments via the valua-tion channel. The methodology is analogous to the one used in the current account reversalliterature. That is, we conduct an event study where a large valuation shock is defined as theyear in which the valuation channel goes beyond a threshold.

Using a sample of 38 countries, we derive the valuation channel from the accounting frame-work used in Lane and Milesi-Ferretti (2007b) and identify 59 large valuation shocks between1994 and 2004. This finding raises the following questions: Are large valuations the resultof sizeable gross stocks? What is the relative role of the debt, direct investment or portfolioequity? Are large valuations persistent? Does a different pattern emerge for developing andadvanced countries?

To answer these questions, we calculate the relative role of sizeable net external positionsand gross stocks (gross international financial integration) in these large valuation shocks. Wedo this for the total international portfolio and for the debt, direct investment and portfolioequity subcomponents. Finally, we study the dynamics of the valuation channel and main

Agustın S. Benetrix - The anatomy of large valuation episodes ... 3

related macroeconomic and asset price variables in the neighborhood of two types of largevaluation episodes.

We find that the level of international financial integration matters for large valuation episodesin advanced economies, since large gross stocks magnify the impact of return differentials.These countries typically do not have large net positions. Rather, gross stocks of foreign assetsand liabilities explain most of the episodes. The main contribution is attributable to the equitysubcomponent.

For emerging markets and developing countries, valuation episodes are determined bysizeable net external positions and large rates of capital losses. In particular, the debt sub-component played the main role. For most of these countries, the cumulated valuation shiftwas persistent, the real exchange rate largely depreciates and the trade balance improves.

In what remains, the paper is organized in four sections. In Section 2, we present the methodto identify large valuation shocks. In Section 3, we evaluate the relative importance of grossstocks and net positions. In Section 4, we analyze the dynamics of the valuation channel anda set of related macroeconomic and asset price variables, in the neighborhood of the valuationepisodes. In Section 5, we conclude.

2 Method

This section constructs the measure of large valuation shocks. To this end, we define the valu-ation channel following Lane and Milesi-Ferretti (2007b) as

V ALt ≡ NFAt −NFAt−1 − CAt. (1)

Equation (1) shows that the valuation term is defined by the change in the net foreign assetposition (NFAt) minus the current account balance (CAt).1

Alternatively, equation (1) can be written as

V ALt = kgAt At−1 − kgL

t Lt−1. (2)

Equation (2) shows that the valuation channel is the net capital gain on the net foreign assetposition, where kgA

t and kgLt are the net rates of capital gain in foreign assets and liabilities

respectively. These, are defined as

kgt ≡Stockt − Stockt−1 − Flowt

Stockt−1. (3)

1Although we take equation (1) as the valuation channel, it is important to mention that part of the differencebetween the change in the net foreign asset position and the capital flows may be explained by data revisions(Lane and Milesi-Ferretti 2008). This decomposition of net foreign assets dynamics between the valuation term andcurrent account is also analogous to equation (21) in Ghironi et al. (2007).


To ensure that our measure allows for cross-country comparisons, we scale variables asratios to GDP. In the analysis, it is also helpful to define the measure of gross internationalfinancial integration following Lane and Milesi-Ferretti (2001, 2007a) as

IFIt ≡At + Lt

GDPt. (4)

Since we are concerned with large shifts in the net foreign asset positions, our study isclosely related to the current account reversals and the sudden stops literature. Milesi-Ferrettiand Razin (1998a) define a current account reversal if the following two conditions are satisfied.First, an average reduction in the current account deficit of at least three percentage points ofGDP in a period of three years with respect to the three years before the event. Second, themaximum deficit after the reversal is no larger than the minimum deficit in the three yearspreceding the reversal. Milesi-Ferretti and Razin (1998b) add a third condition to define acurrent account reversal: the average current account deficit must be reduced by at least onethird.

Edwards (2004) follows a different strategy. He concentrates on the changes from one yearto another. He defines a current account reversal as a reduction in the current account deficit ofat least four percent in one year and a sudden stop by a capital inflows decline of at least fivepercent of GDP in one year. By contrast, Calvo et al. (2004) define a sudden stop as a phasethat meets three conditions. First, it contains at least one observation in which the year-on-yearfall in capital flows lies at least two standard deviations below its sample mean. Second, itends when the annual change in capital flows exceeds one standard deviation below its samplemean. Third, the start of a sudden stop phase is determined by the first time the annual changein capital flows falls one standard deviation below the mean.

Our study follows a strategy similar to Edwards (2004). Specifically, we analyze the changesfrom one year to another, setting the threshold equal to 10 percent of GDP. Therefore, a countryhas experienced a large valuation shock if the following condition is satisfied:

valt =∣∣∣∣NFAt −NFAt−1 − CAt

GDPt

∣∣∣∣ > 0.1 (5)

Since we are interested in the ‘home country’ perspective, we compute this ratio in localcurrency. In this way, we will also capture the effect of the exchange rate movements.

Figure 1 presents, on the vertical axis, the number of large valuation shocks for the periodbetween 1971 and 2004 as defined by equation (5). Large valuation shocks together with theirvalues and signs are reported in Table 1 for the period 1994 to 2004. Due to data quality issuesand availability, the next sections will be based on this period only. We exclude countries wherethe average inflation rate, in this period, was greater than 40 percent and where the inflationrate the year of the large valuation shock was also greater than 40 percent.

Table 1 shows that 21 out of the 22 large valuation shocks were negative in the group of


emerging markets and developing countries. The only positive large valuation shock in thisgroup took place in Israel in 2001. Here, the cross-country average number of large valuationshocks is 1.3.

For the group formed by advanced countries, the valuation channel hits the 10 percent ofGDP threshold 37 times, giving an average of 1.8 large valuation shocks by country. Here, thesigns of the large valuation shocks are mixed: 15 positive and 22 negative.

3 International financial integration and the net external position

3.1 Accounting

Taking into account that countries have experienced an increase in gross international financialintegration, this section decomposes the valuation channel to show the relative role played bysizable gross stocks and large net positions in large valuation shocks.2 To this end, we add andsubtract kgL

t At−1 from equation (2) and divide by GDPt to obtain

valt =(kgA

t − kgLt

)at−1 + kgL

t nfat−1. (6)

Variables at−1, lt−1 and nfat−1 are the outstanding levels of foreign assets and liabilitiesand the net foreign asset position, scaled by GDPt. The first term on the right side of equation(6) shows the role of gross stocks. The larger the outstanding gross stock of foreign assets,the greater will be the valuation generated by a given difference in the rates of capital gainbetween assets and liabilities. The second term shows the role of the outstanding net foreignasset position for a given rate of capital gain in foreign liabilities.

Although this expression is informative, it is not possible to separate the effect of outstand-ing gross stocks of foreign assets plus liabilities and the net foreign asset position directly.Adding and subtracting kgA

t Lt−1 from equation (2), adding this expression to equation (6) andrearranging, yields

valt = kgtnfat−1 + kgdevt(at−1 + lt−1) (7)

= valnett + valgrosst (8)

where kgt = kgAt +kgL

t2 and kgdevt = kgA

t −kgLt

2 . In contrast to equation (6), equation (7) breaksdown the roles of net positions and gross stocks in the kgtnfat−1 and kgdevt(at−1 + lt−1) terms.We call these terms valnett and valgrosst, respectively.

Levels of the rates of capital gain matter for the valnett term. The valuation attributable

2We compare diversification finance versus development finance international investments. See Obstfeld andTaylor (2002).


to it depends on the size of the net foreign asset position as well as the mean rate of capitalgain or loss, given by kgt. Therefore, even if the size of gross stocks may be small, a large netposition combined with high rates of capital gain or loss will give a predominant role to theterm valnett, in equation (8).

Conversely, if rates of capital gain are low and the difference between these rates in assetsand liabilities is high, the term valgrosst will play the predominant role in propagating a shockto the economy. This means that, when gross stocks of foreign assets and liabilities are largeand the net foreign asset position is small, what matters is the spread between the rates ofcapital gain in assets and liabilities, rather than the level of these rates. This spread is capturedby kgdevt in equation (7).

Figure 2 shows these two roles by plotting valnett and valgrosst for each large valuationshock, with valnett along the horizontal axis and valgrosst along the vertical axis. An inspec-tion of this figure shows that valgrosst played an important role. For instance, in most of theadvanced countries, the valuation generated by the valgrosst term was larger than the valu-ation generated by the valnett term. By contrast, the role of the valgrosst term in emergingmarkets and developing countries was not predominant. The contribution of net foreign assetpositions, measured by the valnett term was also important in these countries.

Taking this evidence into account, we propose a taxonomy of large valuation shocks basedon the relative roles of valnett and valgrosst. To this end, we define:

Definition 1 A large valuation shock is Type-N if |valnett| > |valgrosst|.

Definition 2 A large valuation shock is Type-G if |valnett| < |valgrosst|.

Table 2 presents the decomposition of the large valuation shocks into all the components ofequation (7) as well as the type of the shock according to definitions 1 and 2. From the 50 caseswere this decomposition is performed, 16 percent were Type-N and 84 percent were Type-G. Inthe advanced countries group, 5.4 percent of the shocks were Type-N while 94.6 percent wereType-G. In contrast, the group formed by developing markets and emerging countries presents53.8 and 46.2 percent of Type-N and Type-G large valuation shocks, respectively. In terms ofthe shares of these groups in the shocks types, advanced countries represent 83.3 percent of allthe Type-G shocks and 25 percent of all the Type-N shocks.

3.2 Subcomponents

Since Lane and Milesi-Ferretti (2001, 2007a) break the international portfolio into debt, portfolioequity and direct investment, it is possible to apply our taxonomy of large valuation shocks tothese subcomponents. Next, we make use of this classification and present the type of eachshock at this level of disaggregation, as well as in the aggregate portfolio.


Tables 3 - 5 present the decomposition of the valuation channel in equation (7), as well as thetype of shock in the aggregate portfolio and in each subcomponent, according to definitions 1and 2. From here onwards, we refer to the type of shock in each subcomponent using theDEBT-, PEQ- and FDI- mnemonics for debt, portfolio equity and foreign direct investment,respectively.

When we study the shock type in the debt subcomponent conditional on the aggregate largevaluation shock being Type-G, we find that 52.4 percent of these shocks were DEBT-G and thatmost of them took place in advanced countries. By contrast, when we condition the analysison the aggregate shock being Type-N, we find that 75 percent were DEBT-N and occurred inemerging markets and developing countries only.

The assessment of the equity subcomponents shows that the proportion of type G shocksconditional on the aggregate large valuation shock being Type-G is higher than in the debtcase. In portfolio equity, 69 percent of these shocks were also PEQ-G while in foreign directinvestment, 71.4 percent were FDI-G. As in the debt case, most of these occurred in advancedcountries. By contrast, when we condition on the aggregate shock being Type-N, we find that37.5 percent of the shocks were PEQ-N and 62.5 percent were FDI-N.

3.3 Summary

The study of the aggregate international investment portfolio shows that Type-N large valua-tion shocks are mainly present in emerging markets and developing countries, while Type-Gdominates in advanced countries. The reason lies in the high mean rates of capital loss com-bined with large net foreign asset positions in the former group, and high spreads betweenthe rates of capital gains combined with large gross stocks in the latter group. In terms of thesubcomponents, Type-N shocks were typically driven by net valuation movements in the debtcategories. For the Type-G large valuation shocks, gross stocks in the equity subcomponentcombined with high spreads played the predominant role in most advanced countries.

4 Large valuation episodes and macroeconomic dynamics

4.1 Method

As mentioned, this paper is closely related to the current account reversal and sudden stopliterature. In this field, Milesi-Ferretti and Razin (1998a, 1998b) show what triggers current ac-count reversals and which factors determine how costly these reversals are. To this end, theyexamine low- and middle-income countries and find that domestic variables such as currentaccount balances, the degree of trade openness and levels of reserves contribute to the likeli-hood of current account reversals. External variables, such as unfavorable terms of trade andhigh interest rates in advanced economies, also contribute to the probability of these reversals.


Using a panel of 157 countries, Edwards (2004) shows that current account reversals andsudden stops are associated: 46.1 percent of the countries subject to sudden stops faced a cur-rent account reversal and 22.9 percent of those subject to current account reversals faced asudden stop in the same year.

Following the event study methodology of Eichengreen et al. (1995) that distinguishes be-tween periods of ‘turbulence’ from periods of ‘tranquility’, Milesi-Ferretti and Razin (1998b)show that the current account reversals are highly associated with major changes in externalpositions.

The literature has also studied the role of the valuation channel in the context of gradualexternal adjustments. For instance, Lane and Milesi-Ferretti (2006) show that the valuationchannel tends to stabilize the external position in advanced countries. This is due to assets andliabilities being mostly denominated in foreign and domestic currency respectively. With thisbalance sheet structure, a currency depreciation improves the net foreign asset position.

Evidence on the valuation channel stabilizing the external position of the United States,can be found in the International Monetary Fund’s World Economic Outlook (2005), Lane andMilesi-Ferretti (2006) and Gourinchas and Rey (2007b). Studies assessing empirically the con-tribution of the valuation channel to the external adjustment process (De Gregorio 2005; Obst-feld and Rogoff 2005 and Lane and Milesi-Ferretti 2007b), conclude that the valuation channelaccounts for 14-30 percent of the total adjustment. In addition, Gourinchas and Rey (2007b)investigate the relative importance of exchange rate movements to adjustment of external im-balances via the valuation or trade channel, finding that stabilizing valuation effects contributeas much as 27 percent to the external adjustment for the United States.

In what follows, we assess the dynamics of the valuation and trade channel together withother related macroeconomic and asset price variables, following the strategy of Milesi-Ferrettiand Razin (1998a, 1998b). We analyze their behavior in the three-year neighborhood of a valua-tion episode and evaluate: whether large valuation shocks were counterbalanced in the follow-ing years; whether the valuation channel and trade channel moved in the same direction andhow real exchange rate, rate of return differentials, equity prices and bond returns behaved inthe neighborhood of these episodes. Furthermore, we report the evolution of the inflation rateand the rate of growth of the real GDP.

Equation (5) defined a large valuation shock by the absolute value for the ratio V ALt/GDPt

being greater than 0.1. Next, we define a large valuation episode as an interval (t, t+N) duringwhich at least one large valuation shock occurs and N ≥ 0. Moreover, it is surrounded by peri-ods of tranquility, with no large valuation shocks taking place during the intervals (t− 3, t− 1)and (t+N +1, t+N +3). We further distinguish between two types of large valuation episodes.A large valuation episode is Type-A if all the large valuation shocks during the episode havethe same sign. It is Type-B if the episode includes large valuation shocks with opposing signs.Table 1 reports these episodes by country.


Next, we assign countries to three groups. The first group contains developing countriesand emerging markets with negative Type-A episodes. The second group contains advancedcountries with negative Type-A episodes.3 In the last group, we place advanced countries withType-B episodes.

Figure 3 presents cross-country means of the valuation channel, real rate of return in debt,real rate of return in equity, real exchange rate, domestic bond return index, domestic equityprice index, trade balance, rate of growth of real GDP and inflation for the first group of coun-tries. The valuation channel and trade balance are scaled by the year-of-episode GDP. When theepisode lasts more than one year, the scaling factor is the mean GDP of that period. The coun-tries in this group are: Argentina 2002, Brazil 1999-2002, Colombia 1997, Malaysia 1994-1999,Mexico 1994-1995, Philippines 1997-2002, South Africa 1999 and Thailand 1997. The valuationchannel, real exchange rate and trade balance are also reported in Tables 6 and 7 for each coun-try separately. In these Tables, columns t − 3 and t + 3 show the cumulated valuation changescaled by GDP, the mean trade balance scaled by GDP and the mean percentage change in thereal exchange rate in the three-year neighborhood. Column t reports the values in the year ofthe episode or the period-average of the variable if the episode last more than one year.

An inspection of Figure 3 and Table 6 reveals that negative episodes of Type-A were notcounterbalanced afterwards: the capital loss was persistent. The mean cumulative valuationloss remained close to 25 percent of GDP. Moreover, as shown in Table 6, most of these countriescontinued accumulating capital losses in the subsequent years. Figure 3 also shows that the realexchange rate largely depreciates in the year of the episode. The mean annual change was -17.8percent.4 In the year of the episode, the trade balance improves significantly. In this set ofcountries, the real exchange rate depreciation caused the valuation channel and trade balanceto move in opposite directions. This was not the result of large negative net positions alone, itwas also the result of countries having liabilities largely denominated in foreign currency.

Additionally, Figure 3 provides information to evaluate whether the large valuation shockwas Type-N or Type-G. The upsurge in Capital gain Debt strengthens the explanation of largevaluations shocks being Type-N. Moreover, its negative differential significantly increased theburden of the net position in the debt subcomponent and contributed heavily to the negativesign of the whole valuation. Although the mean return differential in equity was positive, therelatively small gross international financial integration prevented this subcomponent fromoffsetting the capital loss coming from the debt subcomponent.

Figure 4 presents cross-country means of advanced countries experiencing negative valua-tion episodes of Type-A. These are: France in 1999, Greece in 2004, Iceland in 2000/2001, Japan

3We analyze only advanced countries with negative Type-A large valuation episodes because we are interestedin drawing general cross-country regularities and the only advanced country with a positive Type-A episode is theUnited Kingdom in 1999.

4In this group, South Africa is the only country experiencing real appreciation (2.9 percent). If we exclude thiscountry to compute the mean depreciation, the mean fall would have been -20.7 percent.


in 1999 and Norway in 2000. In contrast to the previous group, the capital loss in the year ofthe episode was partially counterbalanced in most of these countries. The real exchange ratedisplays no significant change in the year of the episode. The charts for the return differentialshow that these large valuation shocks were mostly Type-G. Large gross stocks in equity ordebt, combined with negative return differentials, either in debt or equity, support this hypoth-esis. The bond return index shows a reduction in its growth rate in the year of the episodewhile the equity price index does so for the year of the episode and the following year.

Type-B large valuation episodes are presented in Figure 5. The advanced countries andthe periods of turbulence are: Ireland 1994-2000, Finland 1998-2000, Netherlands 1994-2002,New Zealand 1995-2000, Sweden 1997-2003 and Switzerland 1996-2004. In this figure, t = 0represents the mean of the variable during the Type-B valuation episode, rather than its valuethe year of the valuation episode. These values are also reported in Table 7 at a country level.For this set of countries, capital losses were not subsequently reversed. Moreover, the negativetrend of the accumulated valuation loss remains negative for the subsequent years, drivenmainly by Ireland and the Netherlands. The return differential for debt is small and positivein the episode and large and negative before and after it. By contrast, the size of the returndifferential for equity declines in the following years.

The real exchange rate, as well as bond and equity indices do not display large changesin behavior. The trade balance, however, experiences a substantial improvement in almost allcountries in the group. The exceptions are New Zealand and Switzerland with a three-yearaverage trade deficit equal to -1.7 and -2.6 percent of GDP, respectively.

5 Conclusions

This paper studies the anatomy of large valuation episodes, giving special attention to the roleof the increase in gross international financial integration experienced by most countries atthe beginning of the 1990s. We study sharp alignments of the external imbalances that havebeen tackled by the current account reversals and sudden stop literature from a new angle:the valuation channel. Our approach shows how re-valuations of foreign assets or liabilitiescontribute to the external adjustment process. To this end, we define two types of large valu-ation shocks based on the valuation produced by net positions and outstanding gross stocks:Type-N and Type-G. Then, using an event-study methodology, we report the contribution ofthese two elements to large valuations in the total international portfolio as well as in its mainsubcomponents.

We also define two types of large valuation episodes as intervals during which at least onelarge valuation shock occurs: Type-A and Type-B. The former comprises valuation shocks withthe same sign, while the latter includes valuation shocks with opposing signs. Furthermore,we present how the dynamics of the related macroeconomic and asset price variables are asso-


ciated with those of the valuation channel in the tranquil times surrounding these episodes.

We find that developing countries and emerging markets had negative and Type-A valu-ation episodes as a result of their large net position. For this group, the debt subcomponentplayed the most important role. The cumulated valuation effect was rarely counterbalanced inthe medium run. Within this group, almost all valuation episodes were associated with largereal exchange rate depreciations followed by improvements in the trade balance. For advancedcountries, however, we find that gross stocks of foreign assets and liabilities played a crucialrole. In Type-A valuation episodes, the cumulated valuation effect was then partially coun-terbalanced. By contrast, the cumulated negative valuation effect does not change its negativetrend after Type-B valuation episodes. Finally, we find that the trade balance does not showsignificant changes after Type-A, but it improves substantially after Type-B large valuationepisodes in the advanced economies.

Appendix: countries and data sources

Countries: The set of countries used to identify the 59 large valuation shocks is formed by 17emerging markets and developing countries and 21 advanced countries. The former is com-posed of Argentina, Brazil, Chile, China, Colombia, India, Indonesia, Israel, Korea, Malaysia,Mexico, Pakistan, Philippines, South Africa, Thailand, Turkey and Venezuela. The latter groupis formed by Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Iceland,Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzer-land, United Kingdom and United States.

Data: Stocks and flows of foreign assets and liabilities (Lane and Milesi-Ferretti 2007a).Trade balance (Direction of Trade Statistics, IMF). Constant GDP in local currency (World De-velopment Indicators). Current account balance and real exchange rate (International FinancialStatistics, IMF). Equity price index (Morgan Stanley Capital International Inc.). Total returnbond index (Global Financial Data). World market price index (Morgan Stanley Capital Inter-national Inc). Foreign assets are the sum of portfolio equity assets, foreign direct investmentand debt assets (debt assets includes foreign exchange reserves minus gold). Foreign liabilitiesare the sum of portfolio equity liabilities, foreign direct investment and debt liabilities.

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Figure 1: Large valuation shocks in time.

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Figure 2: Decomposition of large valuations shocks.

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Notes: This figure presents the first and the second term of equation (7). Filled circles are advanced countries. Thefollowing large valuation shocks are not reported because the data on equity flows and debt flows are not available:Indonesia 1994, 1997, 1998, 2000; Malaysia 1994, 1997, 1999 and Mexico 1994, 1995. As an outlier, the shock ofArgentina in 2002 is also excluded (its values of V ALNETt and V ALGROSSt are -77.1 and 42.9, respectively).


Figure 3: Dynamics around Type-A negative valuation episodes: emerging markets and devel-oping countries.

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-3 -2 -1 0 1 2 3

Trade balance Growth Inflation

Notes: All charts represent cross-country means. The set of countries in this figure is formed by Argentina 2002,Brazil 1999-2002, Colombia 1997, Malaysia 1994-1999, Mexico 1994/1995, Philippines 1997-2002, South Africa 1999and Thailand 1997. Year t = 0 is the year of the valuation episode. When the valuation episode lasts more thanone year, we report in t = 0 the mean of the variable in that period. The analyzed neighborhood is three yearsbefore and after the valuation episode. Valuation: mean and cumulated valuation scaled by GDPt=0. Capital gainDebt: real rate of capital gain in domestic currency for foreign debt assets and liabilities. Debt assets is portfoliodebt + bank debt + foreign exchange reserves minus gold. Debt liabilities is portfolio debt + bank debt. Thailandand Malaysia were not taken into account in this chart. For both countries, previous three years flow data on debtassets was not available. Capital gain Equity: real rate of capital gain in domestic currency for portfolio equity+ foreign direct investment assets and liabilities. Mexico, Colombia, Malaysia and Thailand were not consideredin this chart since data on portfolio equity flows was not available. Real exchange rate: real exchange rate index,RERt=0 = 100. Bond returns: total return local bond index, BRt=0 = 100. Equity price: local equity price index,EPt=0 = 100. Trade balance: trade balance scaled by GDPt=0. Growth: % change in the real GDP in local currency.Inflation: % change in CPI.


Figure 4: Dynamics around Type-A negative valuation episodes: advanced countries.

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Notes: All charts represent cross-country means. The set of countries in this figure is formed by France 1999,Greece 2004, Iceland 2000/2001, Japan 1999 and Norway 2000. Year t = 0 is the year of the valuation episode.The analyzed neighborhood is three years before and after the valuation episode. Valuation: mean and cumulatedvaluation scaled by GDPt=0. Capital gain Debt: real rate of capital gain in domestic currency for foreign debt assetsand liabilities. Debt assets is portfolio debt + bank debt + foreign exchange reserves minus gold. Debt liabilities isportfolio debt + bank debt. Capital gain Equity: real rate of capital gain in domestic currency for portfolio equity +foreign direct investment assets and liabilities. Real exchange rate: real exchange rate index, RERt=0 = 100. Bondreturns: total return local bond index, BRt=0 = 100. Equity price: local equity price index, EPt=0 = 100. Tradebalance: trade balance scaled by GDPt=0. Growth: % change in the real GDP in local currency. Inflation: % changein CPI.


Figure 5: Dynamics around Type-B valuation episodes: advanced countries.

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Notes: All charts represent cross-country means. The Type-B valuation episodes in this figure are: Ireland 1994-2000, Finland 1998-2002, Netherlands 1994-2002, New Zealand 1995-2000, Sweden 1997-2003 and Switzerland 1996-2004. In t = 0 we plot the average value of the variable in the Type-B valuation episode. The analyzed neighborhoodis three years before and after the valuation episode. Valuation: mean and cumulated valuation scaled by GDPt=0.Capital gain Debt: real rate of capital gain in domestic currency for foreign debt assets and liabilities. Debt assetsis portfolio debt + bank debt + foreign exchange reserves minus gold. Debt liabilities is portfolio debt + bank debt.Capital gain Equity: real rate of capital gain in domestic currency for portfolio equity + foreign direct investmentassets and liabilities. Real exchange Rate: real exchange rate index, RERt=0 = 100. Bond returns: total returnlocal bond index, BRt=0 = 100. Equity price: local equity price index, EPt=0 = 100. Trade balance: trade balancescaled by GDPt=0. Growth: % change in the real GDP in local currency. Inflation: % change in CPI.


Table 1: Large valuation shocks.

Emerging markets and developing countries

Country 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Episode Type-

Argentina -44.8 ABrazil -11.4 -13.7 AColombia -11.7 AIndonesia -13.3 -45.2 -53.7 -11.5 -11.9 AIsrael -23.3 12.2 BMalaysia -15.1 -12.9 -22.2 AMexico -16.7 -22.6 APhilippines -20.5 -13.0 -22.9 -10.2 ASouth Africa -18.5 AThailand -38.4 A

Advanced countries

Country 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Episode Type-

Finland -40.3 -88.1 46.5 32.7 BFrance -11.5 AGreece -12.6 AIceland -11.5 -13.9 AIreland 12.1 34.2 11.3 20.7 -46.4 BJapan -12.1 ANetherlands -31.0 -12.2 -14.1 -18.8 27.2 -12.8 BNew Zealand -12.3 18.3 19.2 BNorway -14.2 ASweden 11.0 15.3 12.4 -12.1 21.0 -30.1 -14.2 BSwitzerland 21.7 -10.8 -30.7 -13.6 -14.3 BUnited Kingdom 10.3 A

Notes: Large valuation shocks in domestic currency.


Table 2: Valuation decomposition: total.

Year Country kgt nfat−1 kgdevt (at−1 + lt−1) Type-

1994 Ireland 0.9 -39.7 3.2 292.4 G1994 Netherlands -15.2 15.2 -9.6 281.6 G1996 Netherlands 8.9 -11.5 -2.1 259.2 G1996 Switzerland 9.1 89.6 2.2 431.6 G1997 Colombia 10.3 -20.0 -10.5 53.2 G1997 Ireland 34.7 -21.5 9.2 396.4 G1997 Netherlands 6.7 -17.5 -3.0 294.5 G1997 Sweden 14.5 -37.7 7.3 240.6 G1997 Switzerland 11.2 115.9 -4.7 531.5 G1998 Finland 4.7 -38.5 -22.7 147.2 G1998 Ireland 15.9 13.0 2.1 562.6 G1998 Netherlands -1.1 -23.5 -5.3 348.7 G1998 New Zealand 2.1 -118.3 11.7 188.9 G1998 Sweden 8.2 -22.8 7.2 283.2 G1999 Finland 21.9 -79.0 -31.9 213.9 G1999 France -8.6 7.4 -4.1 275.0 G1999 Ireland -5.4 24.8 2.3 869.9 G1999 Israel 4.7 1.9 -13.7 156.3 G1999 Japan 1.2 26.1 -11.1 109.3 G1999 Netherlands -3.7 -41.0 6.2 453.4 G1999 Philippines 0.0 -61.4 0.5 127.0 G1999 South Africa 33.0 -6.9 -16.3 93.8 G1999 Sweden 17.7 -5.4 4.4 327.1 G1999 United Kingdom 0.4 -14.7 2.1 485.6 G2000 Iceland -1.8 -46.1 -7.7 117.6 G2000 Ireland -8.2 39.6 -4.0 948.8 G2000 New Zealand 8.3 -91.6 14.7 193.4 G2000 Norway 0.0 15.3 -5.5 166.9 G2000 Sweden -2.3 8.8 -2.6 413.9 G2000 Switzerland -0.8 120.0 -3.5 825.9 G2001 Iceland 5.4 -59.6 -5.9 141.6 G2001 Israel -0.2 -24.1 5.7 179.4 G2001 Sweden -12.1 -0.6 6.1 449.8 G2002 Finland -17.6 -73.7 7.3 307.3 G2002 Netherlands -10.7 -13.4 -1.9 554.6 G2002 Philippines 0.8 -61.3 -1.3 135.7 G2002 Sweden -22.6 22.6 -5.9 419.3 G2003 Sweden 1.8 -2.1 -4.3 329.1 G2003 Switzerland 1.4 114.2 -1.3 832.6 G2004 Greece 2.4 -56.8 -6.8 162.2 G2004 Indonesia 4.9 -43.8 -5.5 90.4 G2004 Switzerland -1.5 111.5 -1.7 851.6 G1995 New Zealand 11.4 -86.4 2.1 142.5 N1997 Philippines 41.4 -44.3 7.0 94.2 N1997 Thailand 61.7 -50.3 -2.4 103.0 N1999 Brazil 49.5 -29.5 7.0 64.6 N2000 Philippines 16.4 -58.5 1.7 135.0 N2001 Finland -18.4 -129.9 7.0 340.3 N2002 Argentina 169.6 -42.9 34.0 118.9 N2002 Brazil 32.7 -45.6 5.6 91.3 N

Notes: Decomposition from equation (7). ‘Type-’ stands for the kind of large valuation shock according to defini-tions 1 and 2. Variables nfat−1, at−1 and lt−1 are the previous year net position, gross stocks of assets and grossstock of liabilities respectively scaled by GDPt. The decomposition for the following countries is not reported be-cause the data on equity flows and debt flows are not available: Indonesia 1994, 1997, 1998, 2000; Malaysia 1994,1997, 1999 and Mexico 1994, 1995.


Table 3: Valuation decomposition: debt.

Year Country kgt nfat−1 kgdevt (at−1 + lt−1) DEBT- Type-

1994 Ireland 1.0 -5.2 5.8 185.7 G G1994 Netherlands -21.2 11.3 -11.8 175.6 G G1996 Netherlands 3.3 -15.8 2.2 141.3 G G1997 Colombia 3.4 -10.7 -6.9 41.2 G G1997 Ireland 23.0 24.3 15.8 269.7 G G1997 Netherlands -2.0 -16.4 1.2 150.6 G G1997 Sweden -12.5 -37.6 -6.4 126.4 G G1998 Finland 0.4 -26.3 -1.9 98.0 G G1998 Netherlands -7.6 -17.2 -2.8 176.0 G G1998 Sweden -1.0 -42.8 1.4 117.5 G G1999 Ireland -5.5 120.6 -2.0 603.2 G G1999 Israel -8.4 10.8 -2.4 123.0 G G1999 Netherlands -7.4 -22.9 12.1 231.0 G G1999 Philippines -0.8 -41.1 1.4 99.5 G G2000 Iceland -2.8 -62.0 -11.5 86.9 G G2000 Norway 3.3 -0.3 -5.1 103.9 G G2000 Sweden 4.0 -37.0 -2.4 131.1 G G2001 Sweden -1.3 -39.1 -1.2 156.5 G G2002 Netherlands -7.6 -12.4 -2.0 284.6 G G2002 Philippines 2.3 -41.5 -2.2 110.3 G G2002 Sweden -4.7 -51.6 -2.3 163.2 G G2004 Greece 0.6 -46.4 -6.4 136.8 G G1996 Switzerland 9.5 86.4 1.9 273.2 N G1997 Switzerland 2.4 103.6 -0.3 345.4 N G1998 Ireland 25.3 71.7 1.1 387.0 N G1998 New Zealand 4.3 -54.3 2.3 85.0 N G1999 Finland -17.9 -30.5 -0.7 110.7 N G1999 France -17.1 4.9 0.4 142.8 N G1999 Japan -8.1 22.7 -1.2 90.6 N G1999 South Africa -6.2 -17.6 0.6 34.5 N G1999 Sweden -1.9 -44.2 0.5 129.7 N G1999 United Kingdom -2.8 -13.3 0.04 350.7 N G2000 Ireland -11.5 117.0 0.0 622.4 N G2000 New Zealand 14.7 -47.7 3.4 89.6 N G2000 Switzerland -4.9 100.9 0.9 495.4 N G2001 Iceland 16.5 -83.8 5.7 104.3 N G2001 Israel 7.5 8.0 0.1 118.4 N G2002 Finland -4.0 -16.0 -0.3 141.3 N G2003 Sweden -3.4 -46.3 -1.0 153.3 N G2003 Switzerland -3.2 98.8 -0.4 524.6 N G2004 Indonesia 5.8 -34.5 -0.2 78.8 N G2004 Switzerland -4.2 99.0 -0.7 513.9 N G1995 New Zealand -1.3 -43.9 -3.1 66.2 G N2001 Finland -2.4 -19.1 -1.5 122.4 G N1997 Philippines 51.6 -24.1 -3.0 69.7 N N1997 Thailand 74.3 -31.7 -15.3 80.9 N N1999 Brazil 45.2 -20.2 -4.9 41.1 N N2000 Philippines 23.1 -36.3 -2.8 105.4 N N2002 Argentina 207.7 -21.8 1.6 81.0 N N2002 Brazil 39.3 -26.9 -8.2 52.8 N N

Notes: Decomposition from equation (7). ‘Type-’ stands for the kind of large valuation shock according to defini-tions 1 and 2. ‘DEBT-’ stands for the type of shock in the debt subcomponent. Variables nfat−1, at−1 and lt−1 arethe previous year net position, gross stocks of assets and gross stock of liabilities respectively scaled by GDPt. Thedecomposition for the following countries is not reported because the data on equity flows and debt flows are notavailable: Indonesia 1994, 1997, 1998, 2000; Malaysia 1994, 1997, 1999 and Mexico 1994, 1995.


Table 4: Valuation decomposition: portfolio equity.

Year Country kgt nfat−1 kgdevt (at−1 + lt−1) PEQ- Type-

1994 Netherlands -6.0 -10.0 -6.4 46.5 G G1996 Netherlands 33.9 -8.8 -11.6 51.2 G G1996 Switzerland 14.2 -18.1 6.8 92.1 G G1997 Netherlands 30.3 -17.0 -11.8 68.0 G G1997 Switzerland 33.6 -13.3 -12.5 111.6 G G1998 Finland 59.3 -19.9 -71.8 24.9 G G1998 Ireland -18.5 -26.4 -6.8 116.1 G G1998 Netherlands 19.0 -26.0 -6.0 90.0 G G1998 New Zealand 7.7 -7.1 26.2 24.0 G G1999 France 23.2 -11.0 -11.9 30.9 G G1999 Ireland 7.5 -51.6 17.1 179.8 G G1999 Israel 85.1 -4.3 -68.0 14.8 G G1999 Japan 57.3 -2.2 -51.6 11.7 G G1999 Netherlands 1.8 -34.4 2.3 122.4 G G1999 South Africa 13.8 2.5 13.9 28.1 G G1999 Sweden 38.2 -8.8 -18.6 63.5 G G1999 United Kingdom 19.6 -10.9 12.2 78.1 G G2000 Iceland -11.1 16.2 9.4 20.4 G G2000 Ireland -13.5 -36.2 -2.2 241.6 G G2000 New Zealand -14.2 0.9 12.0 27.8 G G2000 Norway -3.3 8.8 -8.1 24.4 G G2000 Sweden -6.3 -10.1 6.5 94.2 G G2000 Switzerland 7.6 -20.9 -12.3 220.8 G G2001 Sweden -19.6 -10.8 11.9 92.7 G G2002 Sweden -37.2 12.9 9.5 81.5 G G2003 Sweden 24.3 14.6 -8.3 53.3 G G2004 Greece 17.7 -5.8 -15.7 9.7 G G2004 Indonesia -114.8 -6.8 -170.6 6.9 G G2004 Switzerland 2.4 -30.2 -1.3 192.9 G G1997 Sweden 25.2 -11.9 -3.5 39.9 N G1998 Sweden 24.8 -11.2 3.0 51.8 N G1999 Finland 93.8 -58.6 -52.9 66.9 N G1999 Philippines 19.2 -5.7 3.2 8.7 N G2001 Iceland -11.5 22.3 4.0 24.6 N G2001 Israel -21.9 -21.8 10.5 33.3 N G2002 Finland -39.3 -78.4 5.8 107.8 N G2002 Netherlands -27.3 -10.8 -1.7 114.1 N G2002 Philippines -24.4 -2.8 4.4 5.6 N G2003 Switzerland 16.6 -30.8 1.8 170.0 N G1997 Philippines 33.4 -9.1 57.1 10.4 G N2000 Philippines -16.5 -6.7 19.3 10.3 G N2002 Argentina 78.2 3.3 58.2 4.8 G N2002 Brazil 2.4 -6.0 9.9 8.3 G N1995 New Zealand 32.4 -6.7 3.7 13.7 N N1999 Brazil 111.3 -3.5 -28.7 4.4 N N2001 Finland -32.7 -131.2 6.0 160.1 N N

Notes: Decomposition from equation (7). ‘Type-’ stands for the kind of large valuation shock according to defini-tions 1 and 2. ‘PEQ-’ stands for the type of shock in the portfolio equity subcomponent. Variables nfat−1, at−1

and lt−1 are the previous year net position, gross stocks of assets and gross stock of liabilities respectively scaled byGDPt. The decomposition for the following countries is not reported because the data on equity flows and/or debtflows are not available: Colombia 1997; Indonesia 1994, 1997, 1998, 2000; Ireland 1994, 1997; Malaysia 1994, 1997,1999; Mexico 1994, 1995 and Thailand 1997.


Table 5: Valuation decomposition: foreign direct investment.

Year Country kgt nfat−1 kgdevt (at−1 + lt−1) FDI- Type-

1994 Netherlands -4.9 14.0 -5.2 59.5 G G1996 Netherlands 1.1 13.1 -0.4 66.7 G G1997 Netherlands 1.0 16.0 1.2 75.9 G G1997 Sweden 50.3 12.3 21.3 62.0 G G1997 Switzerland 8.2 25.7 4.0 74.5 G G1998 Netherlands -9.3 19.7 -3.0 82.8 G G1998 New Zealand -5.5 -56.9 14.0 79.9 G G1998 Sweden 6.0 31.1 16.0 100.9 G G1999 France -10.9 13.8 -5.1 90.3 G G1999 Israel 6.5 -4.5 -18.5 18.5 G G1999 Japan -8.1 5.5 -18.3 6.7 G G1999 Philippines -7.7 -14.7 -7.5 18.9 G G1999 South Africa 124.7 8.2 -107.0 31.1 G G1999 Sweden 23.7 47.7 12.6 121.7 G G1999 United Kingdom -5.3 9.5 5.0 56.8 G G2000 Iceland -22.4 -0.3 -1.5 10.0 G G2000 Ireland 16.4 -41.1 -24.5 84.8 G G2000 New Zealand -17.8 -44.8 15.2 76.0 G G2000 Norway -6.5 6.7 -3.1 38.7 G G2000 Sweden -6.2 55.5 -6.0 177.5 G G2001 Iceland 7.5 1.9 -17.3 12.7 G G2001 Israel -2.5 -10.4 3.9 27.7 G G2001 Sweden -20.5 47.9 14.3 184.8 G G2002 Netherlands -10.7 10.8 -2.1 135.2 G G2002 Philippines 1.5 -16.9 2.1 19.8 G G2003 Sweden 3.6 29.9 -14.1 104.6 G G2003 Switzerland 0.2 46.3 -1.6 138.0 G G2004 Greece 5.5 -4.9 -4.2 15.7 G G2004 Indonesia -68.3 -2.5 -53.3 4.8 G G2004 Switzerland 3.3 42.7 -4.6 144.8 G G1994 Ireland -8.4 -28.7 -0.1 49.3 N G1996 Switzerland 3.1 21.3 0.2 66.3 N G1997 Colombia 31.9 -8.8 -11.9 10.6 N G1997 Ireland 33.8 -26.1 0.1 47.5 N G1998 Finland -59.8 8.4 3.7 23.1 N G1998 Ireland 17.5 -32.4 0.4 59.5 N G1999 Finland -19.2 10.2 4.4 36.1 N G1999 Ireland -16.5 -44.3 3.3 86.9 N G1999 Netherlands -17.7 16.4 -1.4 100.0 N G2000 Switzerland -7.1 40.0 2.5 109.6 N G2002 Finland -16.0 20.5 1.9 55.5 N G2002 Sweden -39.0 60.7 -4.3 161.2 N G1999 Brazil 36.8 -5.8 43.3 19.1 G N2002 Argentina 120.0 -24.4 107.6 33.1 G N2002 Brazil 26.2 -12.7 25.8 30.2 G N1995 New Zealand 18.2 -35.9 4.3 62.5 N N1997 Philippines 14.8 -11.1 10.9 14.1 N N1997 Thailand 37.5 -10.0 26.1 13.4 N N2000 Philippines -7.1 -15.6 -0.7 19.3 N N2001 Finland -15.5 19.8 0.1 54.4 N N

Notes: Decomposition from equation (7). ‘Type-’ stands for the kind of large valuation shock according to defini-tions 1 and 2. ‘FDI-’ stands for the type of shock in the foreign direct investment subcomponent. Variables nfat−1,at−1 and lt−1 are the previous year net position, gross stocks of assets and gross stock of liabilities respectivelyscaled by GDPt. The decomposition for the following countries is not reported because the data on equity flowsand debt flows are not available: Indonesia 1994, 1997, 1998, 2000; Malaysia 1994, 1997, 1999 and Mexico 1994, 1995.


Table 6: Dynamics in the neighborhood of Type-A episodes.

Type- Country t=0 Variable t− 3 t t + 3

A Argentina 2002 REER 2.8 -61.2 1.3TB 1.7 18.0 14.2Valuation 0.3 -44.8 -8.1*

A Colombia 1997 REER 9.2 -5.1 -5.5TB -3.4 -3.6 -0.3Valuation -3.5 -11.7 1.5

A France 1999 REER -1.5 -5.8 0.2TB 1.0 0.7 -0.3Valuation 4.8 -11.5 4.8

A Greece 2004 REER 3.7 2.2 1.1TB -11.4 -17.9 -21.2Valuation -7.1 -12.6 -10.0

A Iceland 2000/1 REER 2.9 -8.1 8.6TB -4.8 -5.7 -5.3Valuation 1.4 -12.8 2.4

A Indonesia 2004 REER 8.5 -11.7TB 11.8 11.1 9.4Valuation 0.0 -11.9 -1.2

A Japan 1999 REER -2.0 16.3 -7.3TB 1.9 2.4 1.7Valuation 2.9 -12.1 10.2

A Mexico 1994/5 REER 8.9 -22.0 11.2TB -5.1 -3.8 -3.1Valuation -2.6 -20.0 -23.6

A Norway 2000 REER -1.0 -1.6 1.6TB 5.5 15.5 16.0Valuation 2.2 -14.2 0.9

A South Africa 1999 REER -6.0 2.9 -2.1TB -1.9 -1.4 1.1Valuation 8.8 -18.5 20.7

A Thailand 1997 REER 2.0 -33.0 4.5TB -10.1 -3.3 5.9Valuation 7.3 -38.4 3.9

A United Kingdom 1999 REER 8.5 5.5 0.0TB -2.1 -3.5 -3.8Valuation -10.4 10.3 8.6

A Brazil 1999-2002 REER -0.8 -15.9 12.2*TB -2.4 -0.1 5.5Valuation -6.1 -31.2 -6.7

A Indonesia 1994-2000 REER 2.6 -4.8 8.5TB 3.6 8.8 15.4Valuation -4.9 -133.1 -0.1

A Malaysia 1994-1999 REER 3.8 -3.2 2.0TB 0.0 5.6 17.3Valuation -8.3 -40.4 -26.2

A Philippines 1997-2002 REER 6.3 -4.9 -1.3TB -14.0 -1.5 -5.3Valuation 0.6 -74.9 -9.9

Notes: In the column t, value of the variable in the year of the Type-A valuation episode. Valuation: cumulatedvaluation scaled by GDPt=0. TB: mean trade balance scaled by GDPt=0. REER: average % change in the realeffective exchange rate index. * means that the value has been calculated using the available remaining years.


Table 7: Dynamics in the neighborhood of Type-B episodes.

Type- Country t=0 Variable t− 3 t t + 3

B Finland 1998-2002 REER -1.4 -0.2 0.1TB 7.9 8.6 7.2Valuation -11.8 -43.3 -1.2

B Ireland 1994-2000 REER -2.8 -0.8 5.6TB 7.0 20.9 44.9Valuation -8.8 20.7 -19.0

B Israel 1999-2001 REER 0.3 4.2 -8.8TB -6.0 -4.3 -2.7Valuation 19.7 -13.5 2.8

B Netherlands 1994-2002 REER 0.3 0.3 1.4TB 2.6 4.2 9.4Valuation -5.6 -80.4 -17.9

B New Zealand 1995-2000 REER 4.9 -3.2 9.1TB 0.6 -1.5 -1.7Valuation -16.7 19.8 -1.3

B Sweden 1997-2003 REER 3.5 -1.2 -1.2TB 5.5 6.8 8.2Valuation -7.3 3.3 -6.3

B Switzerland 1996-2004 REER 4.1 -0.8 -2.4TB 0.7 0.5 -2.6Valuation -16.7 -53.5 -3.4

Notes: In the column t, average value of the variable in the Type-B valuation episode. Valuation: cumulatedvaluation scaled by GDPt=0. TB: mean trade balance scaled by GDPt=0. REER: average % change in the realeffective exchange rate index.

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The Anatomy of Large Valuation Episodes

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